Month: December 2017

2017 saw global central bank balance sheets explode almost 17% higher (in USD terms) – the biggest annual increase since 2011 – and while correlation is not causation, one can’t help but see a pattern in the chart below…

Global stocks up, Global bonds up, Global commodities up, Financial Conditions easier (despite 3 Fed rate hikes), and Dollar down (most since 2003)…

 

As we noted earlier,  Craig James, chief economist at fund manager CommSec, told Reuters that of the 73 bourses it tracks globally, all but nine have recorded gains in local currency terms this year.

“For the outlook, the key issue is whether the low growth rates of prices and wages will continue, thus prompting central banks to remain on the monetary policy sidelines,” said James. “Globalization and technological change have been influential in keeping inflation low. In short, consumers can buy goods whenever they want and wherever they are.”

Still, the good times may not last: an State Street index that gauges investor risk appetite by what they actually buy and sell, suffered its six straight monthly fall in December, Reuters reported.

“While the broader economic outlook appears increasingly rosy, as captured by measures of consumer and business confidence, the more cautious nature of investors hints at a concern that markets may have already discounted much of the good news,” said Michael Metcalfe, State Street’s head of global macro strategy.

As 2017 winds to a close, Bloomberg reports that a look at the winners and losers around the globe shows that, broadly speaking, the riskiest assets performed well, with bullish sentiment on display in stocks, emerging-market sovereigns and corporate debt. Securities generally seen as the safest and least volatile bets — think Japanese government bonds — trailed behind.

Here’s the best and worst performers in various asset classes over the past year:

Equities

Venezuelan equities soared 3883% in 2017 in USD terms (based on the ‘official’ currency), but that return is destroyed when one adjusts for the 3450% hyperinflationary surge in the number of ‘street’ bolivars needed to buy a USD…

 

The performance is likely a lot less since the noise in the index and the FX rate is incredible.

While Mongolian stocks were best in USD terms, bulls in Ukraine had a good year after the International Monetary Fund said in May that it sees “welcome signs of recovery” for the economy and “a promising basis for further growth.” It was part of a broader rally in emerging markets as investors flocked to developing nations in hopes of higher returns.

It wasn’t a good year, however, to have bet on stocks in Qatar, UAE, Russia, or Pakistan. The Persian Gulf country was thrown into chaos mid-year when Saudi Arabia, the United Arab Emirates, Bahrain and Egypt cut diplomatic and transport ties. In Pakistan, the index was coming from a high base, but also suffered from foreigners pulling money out of the market.

 

In local currency terms (excluding Venezuela), Argentina, Turkey, and Hong Kong outperformed while UAE and Russia lagged…

 

Bonds

As Bloomberg reports, the three-decade bull run for fixed income rolled on in 2017, defying yet again predictions that faster inflation and tighter monetary policy would bring it to an end.

The bond world’s best performers were yesteryear’s losers, with Greece and Argentina among the standouts.

It took effort to lose money on bonds this year — the Japanese central bank’s stitch-up of its government-debt market, and Venezuela’s economic collapse made those two the worst performers in the developed and emerging categories, respectively.

 

Tiny Belize earned top marks in the emerging government-debt category after an upgrade from Moody’s Investors Service in April.

 

Turning to the corporate-debt world, U.S. high-yield securities saw a wide dispersion of results, from high-flying food-and-beverage, retail and transport companies to trauma for holders of bonds sold by commercial printer Cenveo Corp.

 

In the emerging-market corporate debt category, an Indonesian energy company topped the list, while securities tied to Brazilian construction giant Odebrecht SA — which is embroiled in a corruption scandal that stretches across South America — proved to be ones to avoid.

 

 

Commodities

Palladium, which is typically used in pollution-control devices for gasoline vehicles, led gains in precious metals this year by climbing more than 50 percent as investors bet on increased usage in vehicles. Copper and aluminum bulls also had a great year. Those gains were largely tied to better economic prospects across the globe, which would mean higher usage of industrial metals.

On the down side, sugar and natural gas had a bad year. The sweetener has been falling on concerns of a global surplus, while natural gas recently hit a 10-month low following two warm winters that left stockpiles at high levels.

 

Currencies

The biggest gainer in the currency space is a bit on the obscure side: the Mozambique new metical. The East African country has struggled to control inflation following a debt crisis, but the central bank has said it wants to achieve a lower and more stable rate.

On the down side, the Uzbek soum tumbled after the gold-rich republic removed the currency’s peg to the dollar.

 

And finally…

Cryptocurrencies…

Of the largest cryptocurrencies (there are over 1300), while Bitcoin had a great year (up over 1400% in 2017), it was Ripple that was the undoubted winner – rallying almost 28000%!!

 

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Authored by Damir Mujezinovic via Inquisitr.com,

Ron Paul does not believe the U.S. will break into separate countries, like the Soviet Union did, but expects changes in the U.S. monetary policy, as well as the crumbling of the country’s “overseas empire.”

“We as libertarians have some work to do before [voters] are going to accept a true-blue libertarian,” he said, “but I think moving in that direction and having a popular candidate [in 2020] is very possible.”

“If they only hear our message, I know they would choose liberty and sound money and freedom and peace over the mess we have today,”

In the 2016 election, third parties faded to the background. The Libertarian Party nominee for President of the United States, Gary Johnson, won 3 percent of the vote, outperforming the 2012 results when he won 0.9 percent.

 

 

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Two California Professors claim that farmers markets racist “white spaces” because they promote “gentrification” in poor neighborhoods where the “habits of white people are normalized.” 

This, according to a new book by San Diego State University geography professors Pascale Joassart-Marcelli and Fernando J. Bosco entitled “Just Green Enough,” an environmental anthology focusing on urban development.

“Farmers’ markets are often white spaces where the food consumption habits of white people are normalized,” the SDSU professors write, according to Campus Reform.

[F]armers’ markets are “exclusionary” since locals may not be able to “afford the food and/or feel excluded from these new spaces.”

This social exclusion is reinforced by the “whiteness of farmers’ markets” and the “white habitus” that they can reinforce, the professors elaborate, describing farmers’ markets as “white spaces where the food consumption habits of white people are normalized.”

This is a paradoxical outcome, since farmers’ markets are often established in the interest of fighting so-called “food deserts” in lower-income and minority communities. Since grocery stores in low-income communities often lack fresh quality produce, the professors say that in some cases, farmers’ markets may be only source of quality and affordable produce for locals.

The researchers claim that 44 percent of San Diego farmers’ markets are located in wealthier parts of town, which “attract households from higher socio-economic backgrounds, raising property values and displacing low-income residents and people of color” (except, perhaps, wealthy people of color?). 

The professors feel that “curbing gentrification” may be a difficult task, however “strong community involvement” is needed to ensure that the “needs of the poorest…residents are prioritized,” while local governments can choose to enact “equitable zoning policies, rent-control laws, and property tax reforms in favor of long-time homeowners.” 

“Ultimately,” conclude Joassart-Marcelli and Bosco, countering gentrification “requires slow and inclusive steps that balance new initiatives and neighborhood stability to make cities ‘just green enough.’”

Considering the typically liberal membership among farmers’ market collectives, it will be interesting to see if there’s any response from hard working farmers given this opening salvo in the granola wars. 

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Authored by Pater Tenebrarum via Acting-Man.com,

Read Part 1 here…

Cycles and Sentiment

Another recurring pattern consists of the seasonally strong period in gold around the turn of the year, which is bisected by a mid to late December interim low in the gold price. An additional boost can be expected in January and Feburary from the strong seasonal uptrend in silver and platinum group metals as well (to see the seasonal PGM charts, scroll down to our addendum to this recent article by Dimitri Speck).

10 tola cast bar made in Switzerland for Asian markets.

 

Rallies in silver tend to be quite supportive for precious metals stock indexes, as silver stocks have an even higher beta than their gold brethren (note in this context that the XAU is the more broad-based of the two indexes these days and contains far more silver stocks than the HUI – see these lists of the current XAU and HUI constituents for details).

Below is the 20-year seasonal gold chart, with the period from the December 20 interim low to the late February peak highlighted. Note that the statistical data shown on the chart refer specifically to the highlighted period, which in turn is an average of the action at this time of the year over the past 20 years.

Obviously, there are years in which no gain is achieved in the seasonally strong period, but over the past 20 years the probability that prices would rally was 70% (14:6 = 7:3). Moreover, while the gains in profitable years ranged from +8.52 to +17.98%, losses were much smaller, confined to a range of just -1.60 to -3.30%.

Interestingly, even if one averages only the performance of bear market years (i.e., years which close at a y/y loss), the period of strength still shows up during January. We suspect this is due to the exceptional seasonal strength in silver during this time period, gold probably tends to rise in sympathy.

Gold, 20-year seasonal chart with all relevant statistics. The December interim low is close to the mid December Fed meeting, i.e., in recent years the seasonal pattern and the “FOMC relief rally” were going hand in hand – click to enlarge.

 

The 20-year seasonal chart of silver exhibits even more strength over a slightly longer time period starting on the same date: the probability of a rally is 80%, and the average gain is 9.39% (profits ranging from +12.90 to +42.92%), which is a stunning 58.70% annualized.

Note: regardless of how long the period chosen for the calculation is, the seasonally strong period in silver is always clearly visible and exceptionally large; it is even noticeable if one averages only bearish years. Apparently industrial users traditionally stock up at the beginning of the year. Strength in silver tends to particularly helpful for the performance of the XAU and HUI indexes – click to enlarge.

 

By coincidence, a 13 ½ month gold time cycle discussed by Tom McClellan in this article also aligns very closely with the seasonal trend this year, as it bottoms in December. Here is a chart that shows this cycle. Note that both full and half-cycles apparently often tend to align with lows and occasionally consecutive lows “surround” the projected cycle low. In short, this is not the most precise of cycles.

A gold time cycle followed by Tom McClellan – its 2017 trough is in the last week of December – click to enlarge.

 

Such “fixed” time cycles generally have less validity than seasonal patterns, but we thought it was interesting that this particular one happens to coincide with the December turning point in the seasonal trend and the other data points pointing to a December trend change this year.

Regarding sentiment, we want to mention two data points that stood out around the time of the mid-December low: a) just ahead of the FOMC meeting the second-lowest DSI reading of the year occurred (DSI= daily sentiment index of futures traders: 13% bulls – the lowest was 10% at the July low), and b) at the same time the sentimentrader Optix indicator (which combines positioning data in futures and options with the most prominent surveys) fell to 31 points – the lowest reading since early January of 2016.

Gold Optix – not only was the reading of 31 points the lowest since 04 January 2016, it also indicated that bearish sentiment became more pronounced despite gold trading at a higher level than on previous occasions when the Optix reached short term lows this year. This can be interpreted as a bullish divergence. In fact, gold price/ Optix level divergences at lows are quite a common feature (interestingly, they are not as frequent at peaks) – click to enlarge.

 

Sentiment data follow prices, which tends to limit their usefulness, especially in strongly trending markets. We have noticed that depending on whether a strong overarching uptrend or downtrend is underway, the range in which the Optix moves will shift up or down. Once one has a good idea of what this range is, one can expect that readings near its upper and/or lower bounds will at least lead to short term counter-trend moves, regardless of the primary trend.

If the gold market moves sideways – as it has done over the past 1 ½ years – the Optix tends to be quite reliable as a short term contrary indicator. An extremely low (or high) reading that occurs near the boundaries of a sideways price range is usually associated with a medium to longer term opportunity.

 

Insider Activity

We have kept the best for last – this may well be the most interesting and encouraging of the data points we have discussed. As our friends at INK Research in Canada recently reported, lately insider buying at gold companies has basically “gone off the charts” compared to historical standards.

The spike in insider buying in the gold sector this fall (which went hand in hand with the decline in prices) was already the second one this year, but it attained extraordinary proportions. – click to enlarge.

 

There are several things worth noting here: first of all, insider buying in the gold sector is rare, especially outside of the exploration/ junior sub-sector. When exploration company insiders buy, it signals that they are confident in discoveries they have made and believe that investors have yet to realize what their true value is.

While explorers no doubt benefit from rising metal prices, they are not a sine qua non for their success – it is enough if prices manage to remain fairly stable. By way of example, if a company starts out with nothing but a hunch about where to drill, and it suddenly finds a million ounces of near-surface high-grade gold, it won’t matter much whether gold trades at $1,200 or $1,300 – a re-rating of the stock is certain to happen either way.

Two things were remarkable about the recent surge in insider buying: for one thing, it was the biggest since the fall of 2015 (which was one of the most noteworthy such buying sprees in a long time as well). Secondly, it was quite broad-based: there was a lot of buying from insiders at senior and mid-tier producers. As an example, numerous Barrick Gold (ABX) insiders purchased sizable amounts of stock in the public markets (n.b.: it is best to consult Canadian filings, a number of US data providers are silent on the matter).

ABX, daily over the past two years. The chart pattern is of course reminiscent of the HUI pattern, only it looks actually a bit weaker. Since April the declines seem to be a lot more vigorous than the bounces. Insiders have bought the stock hand over fist between late November and late December though – presumably the chart will soon improve – click to enlarge.

 

Keep in mind that gold mining insiders have no special insight in future gold price trends. So what is the message when insiders at senior and mid-tier producers buy stock in the companies they run? Obviously their buying has to be based on what they do know and have control over. We would take it as a sign that the trend toward better cost control and improving margins continues apace, and insiders evidently believe the market is still underestimating it.

Lastly, gold mining insiders have definitely proved savvy with respect to their timing in recent years. Their purchases from mid to late 2015 were certainly amply rewarded, and they actually happened to catch at least a short term low this summer as well. In any case, it is definitely worth paying heed when they buy as much as they recently have – one would normally expect this to be at least of medium term significance.

 

Conclusion

To summarize: chart patterns, seasonal trends and cycles, sentiment and insider buying all paint a fairly positive picture for the gold sector at the moment. This should at least be good enough to support a short term move higher, and perhaps more.

However, as we noted at the beginning of Part 1, things are never as clear-cut as one would like. One fly in the ointment is the fact that the major fundamental gold price drivers are not exactly bullishly aligned right now. Similar to what we observed earlier this year already, they are at best in a neutral or slightly bearish position.

That said, they are pregnant with possibilities (i.e., they all could quite easily turn bullish in view of the increasingly hostile monetary backdrop). We will discuss fundamentals and inter-market relationships relevant to gold in a follow-up post shortly.

Moribund gold bug hoping for better times.

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Unless the world comes to a very serious end in the next few hours, global equity markets are about to do something they have never done before… rise for 13 consecutive months.

Not one losing month in 2017…

 

But it’s not just global equities, the S&P 500 is now up 14 straight months and in just a few hours will complete it first “perfect year” of positive total monthly returns ever…

 

On a side-note, the S&P 500 is up 21 of the last 22 months.

But not only was the upside incredible, there was no downside!! As Dana Lyons details, based on cumulative losses, stocks endured less adversity in 2017 than any other year on record, going back more than 100 years.

Specifically, we tabulated the amount of losses incurred during every down day in the market. We used the  Dow Jones Industrial Average (DJIA) as it has a longer history than the S&P 500. And based on these calculations, the stock market enjoyed less adversity in 2017 than any other year in history going back over 100 years (our daily DJIA data begins in 1915).

As of December 27, the DJIA had lost a cumulative -27.36% on all of its down days throughout 2017. That shattered the prior record of -31.45% set in 1965 which, by the way, is the only other year that saw less than -38% in total losses. So, other than 1965, 2017 experienced nearly 30% less adversity than any other year on record.

To add further context to this extraordinary performance, the average cumulative loss on down days during a year in the DJIA is 90%. That comes out to an average cumulative monthly loss of 7.5% — versus 2017’s average monthly loss of a mere -2.28%.

And finally, as we detailed previously, 2017 was a record low year for average volatility…

Furthermore, as the chart states, the maximum level reached by the VIX in 2017 was 17.28. That is the lowest maximum level attained in any year since inception — and 60% lower than the “average yearly max”. Obviously 2017 was an extraordinary year in its lack of stock volatility.

*  *  *

But then again, maybe we should not be surprised at these all-time-record events… the world has also never seen so many central banks, printing so much money, for so long a time…

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In an otherwise calm market, Italian bonds have been sold off today, breaking away from the broader bullish sentiment amid the European bond market, with the yield on 10Y BTPs rising as much as 5bps, above 2% for the first time since October 26.

While there has been no specific catalyst, some traders are starting to factor in the potential political confusion that could result after the Italian elections due in just over 2 months. As a reminder, on March 4, voters in eurozone’s third-largest economy will head to the polls amid dwindling support for the ruling pro-EU centre-left Democratic party and rising support for the Eurosceptic opposition.

According to the FT, the likely scenarios after the vote range include a hung parliament, a grand coalition or a populist government with a much more confrontational attitude towards Brussels, including the most troubling outcome: plans to question Italy’s membership of the single currency.

As the FT notes correctly points out, “None of the outcomes heralds greater stability for a country that, from an economic and financial point of view, remains the weak link in the 28-member bloc.”

The biggest flashpoints in the race are expected to be Italy’s lacklustre economy and the migration crisis, which has brought more than 620,000 asylum seekers to the country from across the Mediterranean Sea over the past four years.

But analysts say the political wrangling so far has been focused more on the personalities of the party leaders than the huge challenges facing Italy.

“For the moment it’s looking like a very ugly and chaotic campaign,” says Giovanni Orsina, a professor of political science at Luiss university in Rome. “It’s concentrated on personal attacks, provocations and jokes that have nothing to do with real platforms.”

In an attempt to mitigate concerns, Citigroup recently wrote that its economists see a centre-right victory as marginally the most likely outcome, but concede that longer-term, big question marks remain over which individual party will dominate within the bloc and the true depth of ostensible EU-scepticism.

And while a grand coalition over the middle also remains a possibility, albeit a fading one, with the M5S still gaining in many polls at the expense of a struggling PD, their involvement in a future coalition of the left remains a reasonable probability. Although M5S has certainly shifted its stance on the EU significantly, with its candidate for PM declaring he wants to stay in the EU and toning down his party’s opposition to the euro, other of their desired reforms would likely be seen as negative by the market. A less likely coalition between M5S and a party on the right, like Lega Nord, could potentially be more confrontational and even less market-friendly.

Politics aside, there could be a far bigger problem for BTP demand in the coming months: the reason – uncertainty and the expected reduction in ECB purchases.

And here is a startling observation from Citi, which notes that one could argue that private investors fell out of love with BTPs quite some time ago.

As illustrated in the chart below, just about every other major investor type has  become a net seller (to the ECB) or a non-buyer of BTPs over the last couple of years. Said differently, for well over a year, the only marginal buyer of Italian bonds has been the ECB!

 

To change that behaviour, Citi thinks it is pretty likely that there will need to be an adjustment in prices.  And some other thoughts on what a decline in ECB purchases may mean for the price of BTPs:

As our rates strategists have pointed out, the ECB could counteract this through an “Italian Operation Twist” (lengthening the maturity of their BTP holdings), but such a response might not come immediately, given the ECB’s reluctance to favour individual countries, unless associated with the conditionality that comes with an economic adjustment programme.

To our minds, this remains one of the most significant political risks to € credit in 2018. Most likely the spillover on credit would be concentrated on Italian and other periphery names, banks in particular. The scenario of a full-on  funding crisis is a much lower probability in our view, but would obviously have more systemic implications across the € credit market.

Translation: with the investing community having largely forgotten about Italian bonds in the past 3 years since the launch of the ECB’s QE, for an advance warning whether Europe’s period of artificial stability is finally starting to unravel – as many expect once the ECB begins tapering – look no further than BTP yields, and specifically if today’s unexpectedly selloff persists into the new year and certainly if it accelerates.

 

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Gold Tops $1300 – Best Year Since 2010 As USD Tumbles Most In 14 Years

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Fri, 12/29/2017 – 15:07

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Crypto Exchange CEO Released After Paying $1 Million Ransom In Bitcoin

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Fri, 12/29/2017 – 14:45

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Did The "Big Short" Retail CMBX Trade Pay Off In 2017?

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Fri, 12/29/2017 – 14:25

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